Verizon Wireless Buyout For Vodafone? An Historical Perspective

Retail investors, as a group, sometimes have short memories. The same fallacies are played out over and over, yet they never seem to fail at producing short term movements in stock prices. Vodafone ADRs (NASDAQ: VOD) have popped almost 9% since a March 5th Bloomberg report rehashed previous rumors from unnamed persons that Verizon (NYSE: VZ) will buy out its European partner's share of Verizon Wireless. I advise that investors should take profit on such pops in share price, which are likely to recur as both companies revisit this very thorny issue which played out in 2006, 2007, 2010, and again at the beginning of this year.

Each time VOD shares have seen a resulting rise in share price only to return to previous levels within a month. This chart from Google finance illustrates the most recent instance of this behavior, and the current run-up, fairly clearly. Yet the current situation makes a buyout now less likely than ever. In fact, Bronte Capital, whose largest holding is Vodafone shares, just went so far as to call the idea "absurd". Here's why:

Verizon needs its wireless unit to continue making dividend payments to the parent companies in order to fund its own dividend and pension obligations. The dividend issue has been well documented by othercontributors here at SA. This is something VOD shareholders have been seeking for many years, and they finally started reaping the benefits at the end of 2011. Another one was made November of 2012, despite projections to the contrary from Verizon's management. As Bernstein analyst Craig Moffett said to the Wall Street Journal, "There simply isn't any cash elsewhere in the business to fund the common dividend."

Vodafone wants those dividend payments to bolster results while it weathers difficulties in its core European market and its ventures in emerging markets. The difficulties in Europe have been well documented, and because of them, VOD reported an unexpected loss for the six months ended Sept. 2012. The same report also showed decline in emerging markets as the company has faced great uncertainty regarding fees and taxes for its wireless ventures in India and Africa. Consequently the Verizon Wireless JV is providing much needed stability and cash flow while Vodafone works out these issues, and the company would likely demand quite the premium for a buyout. The Bloomberg analyst cites an average price tag of around $115 billion. I'd guess it could be even higher because a buyout would simply make for a tax liability at a time when European governments are being difficult in that department. Thus income is probably looking much more attractive than a lump sum payment to Vodafone about now.

Finally, Verizon just splashed out $3.9 billion to buy spectrum from the cable companies. When you consider that together with the combination of dividend/pension obligations, sales tax liability, and premium valuation, it probably means that Verizon simply can not afford to buy out the JV.

It was also speculated that Verizon might accomplish the same thing by merging with or acquiring Vodafone. However, the Bloomberg report itself states that there are no ongoing talks and that the most recent talks failed due to Verizon's very understandable "resistance to moving to Europe" and "lack of interest in certain Vodafone assets, such as its Indian operations." So in summary, while I have no doubt that VZ would love to fully own its wireless operation, fulfillment of that goal remains a catch 22 situation which is unlikely to be resolved any time soon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I recently sold my VOD shares for the exactly the reason mentioned in this article.

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